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UK’s National Grid trims investment plan, calls for higher shareholder returns

National Grid PLC has submitted its final business plans for the period from 2021 to 2026 to Britain's energy regulator, scaling back its investment needs but insisting on higher shareholder returns.

The utility said on Dec. 9 that it is planning a baseline investment of £7.1 billion into power transmission and £2.8 billion into gas transmission over the five-year regulatory period, dubbed RIIO-T2. On an annual basis, planned spending for its power and gas grids has shrunk by £60 million and £46 million, respectively, since the company released its initial draft plans in July.

National Grid owns and maintains the high-voltage electricity grid in England and Wales, as well as the high-pressure gas network across Britain. SSE PLC and Iberdrola SA-owned Scottish Power operate the power grid in Scotland.

Spending plans by all three utilities have to be approved by the Office of Gas and Electricity Markets, or Ofgem, which is likely to take issue with the companies' proposals for cost of capital — a contentious sticking point ever since the process kicked off in 2018.

Ofgem said in May that it would cut the allowed baseline equity return to 4.3% in a cost of equity range of 4% to 5.6%, using the CPIH inflation index — almost half of what network operators are currently able to pay to investors under the RIIO-T1 framework. The cost of debt would also be lowered under the regulator's proposal.

But in its latest plans, National Grid has stuck with calls for a 6.5% equity return using CPIH, or 5.5% using the RPI index. It also slightly raised its proposed return on debt to 2.93%, for a total rate of return of 4.36%.

Grid utilities across Europe have been pushing back against return cuts, with mixed success. Germany's supreme court upheld a decision to lower investor returns for domestic grid operators in July, while Spain recently softened its proposal to cut returns for power transmission and distribution networks following strong opposition from operators.

National Grid argues that the higher financial incentive is necessary to boost the kind of spending that will be required to reach the government's targets for decarbonizing the entire economy by midcentury. It said the current plan would put it on a path to reach a company target of 50% emissions reduction by 2030 and net-zero emissions by 2050.

To that end, the plan provides "options for additional anticipatory investment to facilitate additional wind generation and develop a national [electric vehicle] rapid charging network," the company said in a press release. It also assumes higher investment in asset health and cyber-related issues, as well as a program to test options for converting gas pipelines to run on hydrogen.

National Grid said the proposal would slightly reduce consumer bills "in real terms" for both power and gas grids. It lowered its overall investment volume after additional efficiencies were identified, although the utility's investment for RIIO-T2 would still be around £400 million higher than under the current regulatory period.

SSE also released its final business plan on Dec. 9, revising up its planned investment for the five-year period from £2.2 billion to £2.4 billion. It said spending could increase by another £1 billion in order to reach the net-zero target.

Both SSE and Scottish Power had also proposed higher equity returns than Ofgem envisioned in its draft business plans earlier this year. In its final version, SSE reduced its equity return proposal, using CPIH, from 6.9% to 6.5%. A spokesperson said the change was due to "updated market evidence." The company said its total investment would reach around £2.2 billion, roughly the same as in its previous draft.

Scottish Power could not be reached for comment.

Ofgem is scheduled to give its initial opinion on all three companies' business plans in the summer and make final determinations before the end of 2020.